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Surge or purge? Why the Merge may not save Ethereum price from ‘Septembear’

Surge or purge? Why the Merge may not save Ethereum price from ‘Septembear’

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Ethereum’s native token, Ether (ETH), is not immune to the downturn in September, rallying around 90% from a June low of around $880.

Much of the token’s rise is due to Merge, a technical update that would make Ethereum a proof-of-stake (PoS) protocol, which is scheduled to be released on September 15th.

Despite impressive gains from June to September, Ether is still trading nearly 70% below its all-time high of around $4,950 from November 2021. Therefore, its chance to go lower remains on the cards.

ETH/USD weekly price chart. Source: TradingView

Here are three bearish market indicators for Ethereum that show why more declines are likely.

Sell ​​Ethereum Merge News

According to Deribit data compiled by Glassnode, Ethereum options traders expect the price of Ether to rise to $2,200 from the current level of $1,540 before the merger. Some even see the price going up to $5,000, but enthusiasm seems flat after the PoS exchange.

There seems to be demand among traders for downside protection after the merger, as evidenced by the so-called “options implied volatility smile” (OIVS) metric.

OIVS illustrates the implied volatilities of options with different strikes for a given expiration date. So equity contracts typically show higher implied volatility and vice versa.

For example, in the Ethereum September 30 options expiration chart below, the slope and shape of the smile help traders gauge the relative expensiveness of the options and assess what kind of downside risk the market is pricing in.

Ethereum OIVS for the contract that expires on 9/30/2022. Source: Glassnode

Thus, it shows strong long-side demand for ETH call options expiring in September, as evidenced by the upward slope of the volatility smile, indicating that investors are willing to pay a premium for a long position.

“After the merger, the left tail is pricing in significantly higher implied volatility, indicating that traders are paying a premium for ‘sell news’ put option protection after the merger,” Glassnode analysts wrote, referring to the OIVS chart below, which also includes call and put open interest at various strike rates.

Ethereum OIVS for contract expiring on October 28, 2022. Source: Glassnode

In other words, ETH traders are hedging their bets against a sell news event.

Hawkish Federal Reserve

More downside hints for Ethereum come from its exposure to macroeconomic events, mainly the Federal Reserve’s quantitative easing.

Last week, Federal Reserve Chairman Jerome Powell reiterated the central bank’s commitment to curbing inflation, noting that they “have to stick with it until the job is done.” In other words, Powell and his colleagues are likely to raise rates by 0.5% to 0.75% at their next meeting in September.

Interest rate hikes have been bad news for the ETH/USD pair recently, given the growing positive correlation between the broader crypto sector and traditional risk indices relative to the decline in cash liquidity. For example, on September 3, the daily correlation coefficient between ETH and Nasdaq was 0.85.

ETH/USD and Nasdaq daily correlation coefficient. Source: TradingView

Therefore, the potential for Ether to fall alongside riskier assets is high, especially if the Fed raises 0.75 percent.

That Giant Ether “Bear Flag”

From a technical perspective, Ether is painting what looks like a bearish flag on its weekly chart.

Bearish flags appear when price consolidates higher within an ascending parallel channel after a sharp decline. They are resolved after the price breaks down from the channel and falls, as a rule of technical analysis, as much as the length of the previous downtrend (flagpole).

Ether tested a bearish flag with lower trendline support this week. From here, the Ethereum token could either recover to retest the flag’s upper trendline (~$2,500) as resistance, or break below the lower trendline to continue its prevailing downtrend.

Related: The Mergen ETH Price Outlook: Bullish or Bearish? | Interview with TheChartGuys

Considering the factors discussed above, the ETH/USD pair threatens to enter the bearish flag breakout phase in September, as shown in the chart below.

ETH/USD weekly price chart with “bear flag” setup. Source: TradingView

Therefore, the profit target for the ETH bear flag is close to $540 in 2022, which is about 65% less than today’s price.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risks, you should do your own research when making a decision.